Don't let it get away!

If you ever want to retire, there's only one way to do it: Save some money on your own. With Social Security in danger, company pensions going by the wayside, and tax rates on the rise, it's more important than ever to boost your savings and to be smart about how you invest.

Opening a tax-favored retirement account like an IRA can be your most valuable tool in accomplishing that goal. Many people are aware of how IRAs can help you cut your taxes. But IRAs can also help you in ways that you may not know.

Later in this article, I'll reveal what could be the most important reason you should open or add to your IRA today. But first, let's make sure everyone's up to speed on the better-known benefits of IRAs.

The big twoIf you ask most people why they like IRAs, they'll give you one of two answers:

Contribute to a traditional IRA, and you can get a big tax break on your tax return this year.

IRAs let your money grow tax-deferred from now until when you take it out after you retire. For Roth IRAs, that income is tax-free forever.

Those are simple reasons, but they're also extremely powerful. Contributing the $5,000 maximum to an IRA before the April 17 filing deadline can save you as much as $1,750 this year.

Yet even more valuable is the tax deferral that IRAs give you. Dividend investors who seek out the highest-yielding stocks they can find know all too well the big chunk of cash that the IRS takes from the income they receive, especially when those dividends don't qualify for lower tax rates. Mortgage REITs Annaly Capital (NYSE: NLY) and Chimera (NYSE: CIM) may be enjoying both year-to-date share-price gains and strong dividend yields due to low interest rates, but outside an IRA, you'll give up as much as 35% of those dividends to taxes -- and that doesn't even include what some states charge for their own taxes.

The tax problem that's getting worse and worseBut an even bigger problem that an IRA solves is having to deal with tax reporting requirements. This year, things are changing for investors. In addition to Schedule D, anyone who sold stocks, bonds, mutual funds, or other investments this year will have to complete the dreaded new Form 8949.

Form 8949 forces you to reconcile your gains and losses with figures your broker is now required to provide. If your broker's numbers are right, then everything's pretty simple. But if they're wrong, then you have to go through a complicated process of reporting corrections. Even worse, with brokers increasingly having to provide numbers directly to the IRS, any mismatches will raise red flags on your filing -- potentially triggering an audit.

IRA investors, however, don't have to worry about Form 8949. Any buying and selling inside your IRA has no tax impact at all.

Why you have to sell sometimesOf course, long-term investors will argue that this is just another reason that long-term buy-and-hold investing makes sense. But often, despite your best intentions, holding on to a stock forever doesn't make sense.

One popular reason lately has been the increase in spinoff activity among big companies. Abbott Labs (NYSE: ABT) , for instance, plans to split off its pharmaceutical segment from its other businesses, which will leave a company that has exposure to medical devices, diagnostic testing, and other health-care areas. ConocoPhillips (NYSE: COP) will break into two pieces later this year, one holding refining and other downstream assets while the other focuses on exploration and production activity. And Rentech (AMEX: RTK) already did a spinoff of its Rentech Nitrogen Partners subsidiary, which focuses entirely on its fertilizer business, to allow Rentech to represent itself as an alternative-energy company.

When these companies complete their spinoffs, investors have a choice to make. If you bought the stock because of one particularly promising piece of the business, then you're entirely justified selling off the other parts. On the other hand, if you liked the company because of its complete package, then you might keep both parts -- or you might decide the two halves no longer add up to as much as the whole was worth.

How IRAs help youIn an IRA, you're free to buy, sell, or hold whenever you want -- without worrying about gains or the complicated reporting requirements. That's getting to be an increasingly valuable advantage of IRAs for retirement investing.

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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitterhere.

Comments from our Foolish Readers

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IRAs also have a downside. It is that foreign taxes on dividends cannot be recovered. In this regard, please list the foreign countries that deduct taxes on dividends going into IRA accounts. I want to avoid that tax.

When we have stocks like NLY and CIM paying very handsome dividends of more than 14%, why would you even consider buying a foreign stock that penalizes you on your dividends? IRA's are a uniqued thing one only finds in the U.S.A. No other country recognizes an IRA.

I've been told that Master Limited Partnerships are not appropriate in an IRA, something about "Unrelated Business Income". Is this nit-picking by the IRS or what? How much of a problem is this? It's pretty bad whena good investment idea is thwarted by the IRS. Anyone care to comment?

But tax treaties change, so don't take this as necessarily applying to all stocks in a given country or to your situation in particular. Moreover, some countries specifically don't charge withholding taxes in an IRA.

MLPs in IRAs can create some issues. But more importantly, there are many tax benefits of MLPs that you effectively waste when you have them in an IRA. Many investors find it more beneficial to keep MLPs in taxable accounts.

Dan: 2 Questions: 1) Can I add to my IRA (up to $5K) and claim that as a deduction if my company offers a 401(k) program, and/or I participate in that 401(k)? It used to be that you couldn't claim the IRA contributions if your employer offered a 401(k), whether you participated or not. Don't know if the rules have changed, and haven't broken out TurboTax you to find out...

2) Can you elaborate on what tax benefits you are wasting by having an MLP in your IRA, and what the benefits are of holding one outside of your IRA? For example, several months ago I added Stonemore Partners, LP, to my IRA (using funds from another position that I'd sold). What might I be facing when I prepare my 2011 taxes by having done this?

Whether you can do both a 401(k) and a deductible IRA depends on your income - there's a limit above which you can only do a nondeductible IRA.

With the MLP comment, I just meant that some MLP distributions are treated as return of capital and not taxed even in regular accounts. So combined with the UBTI issue, keeping an MLP in a retirement account is generally more complicated than it's worth. But you should consult with your own personal tax professional; I'm not allowed to give you advice on this.

I feel like if I just bought and sold stocks for the next 30 years in an IRA I'd still have to make some sense of what I was doing. For instance holding a stock for more than one year so the gain tallies in the long-term capital gains column instead of a short term. This is especially concerning since my horrific online broker is doing an awful job reporting my tax lots. I assume that the day of reconciling, albeit 30 years from now, is waiting for me when I withdraw from an IRA

No, that's exactly my point: there is *no* day of reckoning for IRAs. That tax lot nightmare exists for taxable accounts but not for IRAs, because even in a traditional IRA, all the IRS cares about is how much money you take out, not where it came from.

I agree an MLP in a traditional IRA is a waste of a good tax benefit but why not a Roth? The MLP is taxed at the unit holder level so if it is in a roth, it is not taxed at all. As far as UBI ges, I have never had any problems with that and from what I have read I can't find anyone who ever has.

Sending report...

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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